On April 6, 2017, the California Supreme Court issued its opinion in McGill v. Citibank, N.A., Case No. S224086, which helped to refine the legal landscape regarding the enforceability of arbitration provisions in the aftermath of the United States Supreme Court’s decision in AT&T Mobility LLC v. Concepcion, 563 U.S. 333 (2011). Specifically, the McGill court held that arbitration provisions are invalid to the extent they purport to waive a plaintiff’s right to seek public injunctive relief under the Consumer Legal Remedies Act (“CLRA”), the unfair competition law (“UCL”), and the false advertising law in any forum. In so holding, the California Supreme Court rejected defendant Citibank, N.A.’s contention that the Federal Arbitration Act (“FAA”) requires courts to enforce arbitration agreements, regardless of what they say about the availability of claims for public injunctive relief.

In McGill, the plaintiff opened a credit card account with Citibank and purchased a “credit protector” plan under which Citibank agreed to defer or credit certain amounts on the account when specific events occurred, including disability and unemployment. At various times, Citibank gave notice to plaintiff of its intention to modify the agreement governing that account, and Plaintiff did not decline these modifications, which added an arbitration provision to plaintiff’s agreement. The arbitration provision restricted the arbitrator to awarding relief “only on an individual (non-class, non-representative) basis” and required that claims “must proceed on an individual (non-class, non-representative basis.” The provision contained this further limitation: “If you or we require arbitration of a Claim, neither you, nor we, nor any other person may pursue the Claim in arbitration as a class action, private attorney general action or other representative action, nor may such Claim be pursued on your or our behalf in any litigation in any court.”

Subsequently, plaintiff brought a class action based on Citibank’s marketing of the credit protector plan and the handling of a claim she made after she lost her job. In her complaint, plaintiff sought relief under the CLRA, the UCL, and the false advertising law, and requested an injunction prohibiting Citibank from engaging in further illegal and deceptive practices.

Following Citibank’s motion to compel arbitration, the trial court held that agreements to arbitrate claims for public injunctive relief under the CLRA, UCL, or false advertising law were not enforceable under the so-called Broughton-Cruz rule, which rendered unenforceable agreements to arbitrate claims for public injunctive relief. The Court of Appeal subsequently reversed and remanded on the basis that, pursuant to the U.S. Supreme Court’s decision in Concepcion, the FAA preempted the Broughton-Cruz rule. Plaintiff then filed a petition for review in the California Supreme Court, arguing that the arbitration provision was invalid because the provision had the effect of waiving her right to seek public injunctive relief in any forum. Citibank agreed that the arbitration provision cut off plaintiff’s right to seek public injunctive relief in any forum, but contended that the FAA preempted any state law preventing such waiver.

On review, the California Supreme Court clarified that the dispute did not implicate the Broughton-Cruz rule. It reasoned that the Broughton-Cruz rule “applies only when parties have agreed to arbitrate requests for [public injunctive] relief”; in contrast, the parties in McGill had agreed to exclude requests for public injunctive relief from arbitration. The California Supreme Court instead focused on, and rejected, Citibank’s argument that the FAA preempted state law preventing a waiver of a plaintiff’s claims for public injunctive relief.

The California Supreme Court first observed that, under Civil Code section 3513, “‘[a] law established for a public reason cannot be contravened by a private agreement.’” It then held that waiver of a party’s right to seek public injunctive relief under the CLRA, UCL, or false advertising law in any forum would be unenforceable.

Turning then to the arbitration provision at issue, the California Supreme Court acknowledged that, under Concepcion, arbitration agreements could not be invalidated “‘by defenses that apply only to arbitration or that derive their meaning from the fact that an agreement to arbitrate is at issue.’” However, the California Supreme Court also observed that, under U.S. Supreme Court precedent, the arbitration agreements could still be invalidated by generally applicable contract defenses, such as fraud, duress, and unconscionability.

The California Supreme Court then noted that the prohibition in Civil Code section 3513 was a “generally applicable contract defense” in that it did not apply “only to arbitration or . . . derive[] its meaning from the fact that an agreement to arbitrate is at issue.” In other words, any contract containing a prohibition on public injunctive relief would be invalid. In this respect, the “FAA does not require enforcement of such a provision, in derogation of this generally applicable contract defense, merely because the provision has been inserted into an arbitration agreement.” In so holding, the California Supreme Court further rejected Citibank’s arguments that public injunctive relief is comparable to the type of class action relief that can be waived in arbitration under Concepcion. It also rejected Citibank’s claim that invalidation of the waiver of public injunctive relief would interfere with an “arbitration’s attribute.”

Notably, the California Supreme Court did not resolve whether other portions of the arbitration agreement remained valid despite the vitiation of waivers of plaintiff’s claims for public injunctive relief. Since the parties had not raised the issue, the Court decided to leave these issues to the Court of Appeal on remand.

McGill provides important insights for how parties should view and structure arbitration agreements in California. Parties preparing arbitration agreements must be careful not to incorporate requirements that run afoul of statutory prohibitions like Civil Code section 3513. Such violations may not only void such requirements, they could possibly jeopardize the remainder of the arbitration agreement. Similarly, parties asked to sign arbitration agreements should closely assess relevant provisions to ensure that there is no overreaching by the drafters. When litigation becomes a possibility, those parties should also review the arbitration provisions to assess their enforceability. Ultimately, all sides benefit when the expectations for arbitration are reasonable, clear, and enforceable, and McGill offers guiding principles on how to achieve that result to parties and their counsel.

To find out more about how Emergent helps its clients parse their most important agreements, contact us.